Introduction to Currency Trading
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- Published on Wednesday, 14 December 2011 14:06
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Trading on the Foreign Exchange Market requires some training and understanding of how the market works and what will be needed to be successful in currency trading. Trading in currencies through Forex, Foreign Exchange Currency Trade means that there is a simultaneous transaction of buying a currency while selling another currency. The exchange rates are floating or always changing according to the overall market and the trades are always done in pairs. Forex is an over the counter or Interbank market that deals with high volume transactions.
The Basics of Currency Trading
There are two sources that trading come from, one is foreign trade which makes up about five percent of all transactions, and speculation trade for profit making up the other 95%. Foreign trade is the buying and selling of foreign goods and exchanging the profit into currency. Speculation trade for profit is based on a currency either increasing or decreasing in value in relation to another currency. Eighty-five percent of trading on currencies is in pairs with the major currencies being US Dollar, Japanese Yen, British Pound, Swiss Franc, Australian Dollar, Euro, and Canadian Dollar. For example, the US Dollar is paired up with the Japanese Yen, and the Euro is paired up with the US Dollar, this will appear as USD/YEN and EUR/USD.
The Trader Techniques
There are two kinds of traders who invest in foreign currency, the technical trader and the fundamental trader. These very different approaches look towards economic indicators to determine what and when to invest in the foreign exchange. The technical trader relies on past marketing data to forecast future market changes. The data is studied to determine the best time to enter and exit the market and which market to invest. The fundamental trader, on the other hand, studies the basic elements that are creating the economic trends within a country and will base their investment on why a market is moving a certain way such as government policies, trends in employment etc. Some investors will use a combination of both the fundamental and the technical.
Economic Indicators the Key to Investment
Economic indicators are the key to any currency trading. This data is put out by government agencies and private corporations throughout the world. All investors watch for these reports and it is important to know which reports are important. Some of them can actually move markets and prices. The indicators give vital information as to the health of a country and its currency. There are different indicators such as lagging indicators will have data after a trend has started, and leading indicators will have information before a trend start. The Forex keeps a calendar on all economic indicators and most trading will happen in accordance to the information received on those dates.
Foreign currency exchanges on a daily basis globally and economic conditions determine how the market will fluctuate. Whether it is determined by the events of the day or past trends, the currencies will change hands several times over.
Important Factors in the Forex Currency Market
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- Published on Wednesday, 14 December 2011 13:08
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To know how to trade in the Foreign Exchange, it is important to know what your yield and return is on your investment. This is what is your profit or loss in the transaction, and without knowing what the spread is between what you are buying and selling you may set yourself up for losses without understanding why it is happening. The most important thing to understand is that the yield drives the return, or what the spread or difference is what makes up the profit or loss. The Forex Currency Market is the buying and selling of two currencies at the same time. These two currencies or pairs are already determined and the value is relation to each other.
Yield and Return of Your Investment
What is meant by the value is in relation to each other is that in effect you are using the proceeds from selling one currency to buy the other currency. The currencies are based in pairs with the first of the pairs being the base and the second being the quote. Within this pair each currency has an interest rate that is established by the country’s central bank that it comes from. You are obligated to pay that interest rate when you sell the currency, just as you are entitled to the interest rate of the country that you are purchasing.
Calculating the Return
Interest like pips (percentage in points) are calculated into base points which is 1/100th of one percent. So if you were purchasing a currency at an 8% interest rate the base point would be 800 points and if you were selling at .5% the base rate would be 50 points. For example, if New Zealand’s interest rate is 800 points and you sold Japans currency at an interest rate of 50 points, your profit would be 750 points or 7.5% return on your investment. Knowing where the interest rate is going is important in the Forex Currency Market. Countries that are doing well with a strong growth pattern and increasing inflation will raise their rates to control growth and keep inflation in check.
Determining the Spread
The Forex spread is the difference between the bid (buying price) and the asking (selling price), but is also determined by the supply or float which is the total numbers of shares available to trade, and the demand or interest in an exchange. Forex will also take into account the total trading activity of the currency.
To invest in the Forex currency market the interest rate and economy indicators will be needed to make any sound investment decision. If a countries economy indicators show that the country is facing an economic slowdown and that a recession is possible the country will reduce the interest rates to stabilize the currency. In this case knowing that there will be a downturn in interest rates, the return in investment will not yield what you have determined to be your low investment point and you will consider selling.
The Difference between Forex Market and the Stock Market
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- Published on Tuesday, 13 December 2011 23:57
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The Forex Market or Foreign Exchange Currency Market was established around the 1970s. It was used primarily by banks and financial institutes to earn money or interest on the currency that they held in their own individual country. Countries would exchange money depending on the interest rate that the government established at the time. Interest rates are normally set by each country and are based on their economy and the value of their dollar or unit. The Stock Market, on the other hand, is based within a country and on their own currency. Stock markets do not exchange outside of their system and are based on commerce and corporations that are publically held through stock exchanges. The difference between Forex Market and the Stock Market is very wide.
The Difference in Trading Markets
The Stock Market Exchange has been around for centuries and is one of oldest forms of security exchanges there are. The markets are individualized within a country and are regulated by a security commission. The exchange is made by corporations and entities that have sold some of their assets in the form of stock securities to raise capital investment for expansion. Most of the larger countries have a stock exchange within their boundaries. Their trading is usually through one central exchange and only deals with the currency of the specific country.
The Foreign Exchange Market called Forex, trades globally in foreign currencies and does not have a central exchange. This trading until recently was done by governments, banks, financial institutions. The Forex market has now expanded to individuals with the opening of Forex Brokers. The currencies are bought and sold in pairs and in exchange for the each other. The Forex market is a higher risk investment than the stock market, because of the larger investments and leverages. It is possible to leverage a small investment up to two hundred to one. With this kind of leverage, profits as well as losses can happen very quickly.
The Difference in Operations
Forex is open twenty four hours a day, seven days a week which means that trading can happen at any time that the trader wants to invest. It is a free flowing exchange that is based on what is happening in the world at any given moment. There is no gap in trading or waiting for the market to open. There are no commissions in the Forex market; brokers make their income off of the interest rates from the central banks. Since there are only six or seven major pairs of exchange, information is readily available in making investment decisions. The information is based on public information supplied by governments and their economic and political policies.
The Stock Exchange has a starting and ending period when trading is being done. Although trading can happen in off hours there is a risk in the gaps from bidding to asking. Since the Stock Exchange is made up of many businesses and information is private, it’s not so easily attainable.